In 2016 the EU Council committed to coordinated policy efforts in the fight against tax fraud, evasion and avoidance and adopted the "Conclusions on criteria and process leading to the establishment of the EU list of non-cooperative jurisdictions for tax purposes".
The Code of Conduct Group were then instructed by the EU Council to undertake a screening process whereby jurisdictions, including Guernsey, were assessed against three standards in respect of:
i) tax transparency,
ii) fair taxation, and
iii) compliance with anti-Base Erosion and Profit Shifting ("BEPS") measures.
No issues were raised in respect of Guernsey's standards of tax transparency and anti-BEPs compliance however, during the screening process the Code of Conduct Group expressed concern that Guernsey did not have a "legal substance requirement for entities doing business in or through the jurisdiction". The Code of Conduct Group were concerned that this "increases the risk that profits registered in a jurisdiction are not commensurate with economic activities and substantial economic presence".
These concerns were articulated in a letter to Guernsey, in November 2017, and in response Guernsey made a commitment to address these concerns by the end of December 2018.
As identical concerns were raised in Jersey and the Isle of Man, the Crown Dependencies have worked closely together to develop legislation to address the Code of Conduct Group's concerns. Representatives from the relevant industry sectors have also been involved to ensure the legislation can work in practice as well as meet the requirements of the EU.
The legislation will require companies tax resident in Guernsey, undertaking specific activities, to demonstrate that they have sufficient substance in Guernsey. With effect from 1 July 2021, the legislation will also extend the scope of economic substance to partnerships.
- The legislation has been designed to address concerns that companies/partnerships could be used to artificially attract profits that are not commensurate with economic activities and substantial economic prescence in Guernsey.
- With this in mind the legislation requires certain companies/partnerships to demonstrate they have substance by:
- the relevant activities being directed and managed in the Island;
- conducting Core Income Generating Activities ("CIGA") in the Island; and
- there being adequate people, premises and expenditure in the Island.
- These substance requirements apply to the following categories of geographically mobile financial and other service activities (the "relevant activities"), identified by the OECD's Forum on Harmful Tax Practices:
- Fund Management (this does not include companies/partnerships that are Collective Investment Vehicles unless they are a self-managed fund);
- Financing & leasing;
- Distribution and service centres;
- Holding Body (a pure equity holding body); and
- Intellectual Property (for which there are specific requirements in high-risk scenarios).
- All tax resident companies will be required to provide more information in their tax returns to ensure the above activities can be identified. Partnerships will also be required to register and file an annual tax return to ensure the above activities can be identified.
- Substance Questions Version 1.0 issued on 01.10.2019 [778kb]
- Companies that would be resident in Guernsey (if not exempt)/partnerships that have been granted exemption under paragraph 3 or 5 of Schedule 1 to the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 will also be subject to the substance requirements and therefore required to provide additional information if they carry on a relevant activity.
- Tax returns will also be tailored to collect the information needed to monitor compliance with the substance requirements.
- Collective investment schemes regulated by the Guernsey Financial Services Commission under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 are out of scope from these new legal substance requirements, unless they are a self-managed fund.
- The Crown Dependencies have prepared this more comprehensive guidance to supplement the key aspects document, which should be read in conjunction with the legislation. This guidance is being published jointly by Guernsey, Jersey and the Isle of Man now, to enable industry to engage and provide feedback, however is to be treated as a work in progress recognising that further technical aspects will develop through further discussions with the Organisation for Economic Co-operation and Development Forum on Harmful Tax Practices and the European Union Code of Conduct Group on Business Taxation.
- The tax administrations from the Crown Dependencies will continue to work together to further develop this guidance, which will be updated periodically, and will be complemented by Island specific guidance. The guidance is principles based and therefore cannot cover specific scenarios and will not replace the need to take independent professional advice.
- Guidance on aspects in relation to the economic substance requirements version 1 issued 26.04.19 [488kb]
- Guidance on aspects in relation to the economic substance requirements, version 2 issued 22.11.19 [532kb]
- Key Aspects in relation to economic substance requirements [337kb] version 2 - tracked
- Flowchart in relation to economic substance [454kb]
- Guidance on the Economic Substance Requirements and the implications of COVID-19 [415kb]
- The Income Tax (Substance Requirements) (Guernsey) (Amendment) Ordinance, 2018 was approved by the States of Deliberation on 28 November 2018 and provides the ability for the Policy & Resources Committee to make Regulations requiring companies carrying on, or undertaking, relevant activities to have substance in Guernsey.
- The detail of the substance requirement is contained in the Income Tax (Substance Requirements) (Implementation) Regulations, 2018, which were made by the Policy & Resources Committee on 13 December 2018, taking effect from 1 January 2019.
- The 2018 Regulations were amended by the Income Tax (Substance Requirements) (Implementation) (Amendment) Regulations, 2018, which were made by the Policy & Resources Committee on 19 December 2018, taking effect from 1 January 2019.
- The 2018 Regulations were further amended by the Income Tax (Substance Requirements) (Implementation) (Amendment) Regulations, 2019, which were made by the Policy & Resources Committee on 29 July 2019, taking effect from 1 August 2019.
- The 2018 Regulations were further amended by the Income Tax (Substance Requirements) (Implementation) (Amendment) Regulations, 2020, which were made by the Policy & Resources Committee on 10 September 2020, taking effect from 1 October 2020.
- The Income Tax (Substance Requirements)(Implementation) Regulations, 2021, which were made by the Policy & Resources Committee on 22 June 2021, taking effect from 30 June 2021 - these regulations are a consolidation of the original substance requirements regulations, and include the necessary amendments to accommodate the application of substance requirements to partnerships.
- The Limited Partnerships (Guernsey) (Striking Off) Regulations, 2021, which were made by the Committee for Economic Development on 25 June 2021, taking effect from 30 June 2021.
- The Income Tax (Substance Requirements) (Guernsey) (Amendment) Ordinance 2018 [564kb]
- The Income Tax (Substance Requirements) (Implementation) Regulations, 2018 [15Mb]
- The Income Tax (Substance Requirements) (Implementation) (Amendment) Regulations, 2018 [264kb]
- Corporate residence [474kb] (GSCCA Circular 9)
- Proposed changes to economic substance regulations [510kb] (GSCCA Circular 11)
- Income Tax (Substance Requirements) (Implementation) (Amendment) Regulations, 2019 [7Mb]
- The Income Tax (Substance Requirements)(Implementation)(Amendment) Regulations, 2020 [288kb]
- Changes to Economic Substance Regulations in respect of partnerships [577kb] (GSCCA Circular 18)
- The Limited Partnerships (Guernsey) (Striking Off) Regulations, 2021 [194kb]
- The Income Tax (Substance Requirements) (Implementation) Regulations, 2021 [534kb]
- A public consultation was launched on 6th August regarding the proposals to which there were over 200 responses with 15 industry/professional bodies providing responses. The majority of respondents acknowledged the necessity of compliance with the Code of Conduct Group's requirements and following the global anti-BEPS agenda. They also generally viewed the burden of requirements as relatively low.
- A number of specific industry sector meetings have been held which, together with the feedback from that consultation, has informed drafting of the proposals, relevant legislation and will allow government to ensure a smooth transition for companies carrying on relevant activities.
- The letter from the Code of Conduct Group and the statement from the President of the Policy & Resources Committee dated November 2017
- The report prepared by the Code of Conduct Group and agreed by ECOFIN on 5 December 2017
- Annex 4 of the Scoping Paper endorsed by ECOFIN on 8 June 2018
- OECD Forum on Harmful Tax Practices 2017 report